A recent rise in inflation has been partly stoked by inflows of hot money, and ordinary Chinese salary earners are paying the price.

Xinhua News Agency reported on the issue Thursday, citing the example of a man surnamed Wu who has been working and living in Beijing for seven years.

"In April, the rental contract for my apartment near the East Fourth Ring Road expired. The landlord wanted to raise the rent to 3,800 yuan ($620) a month from 3,300 yuan," Wu was quoted by Xinhua as saying. He could not pay the extra money and was forced to relocate.

The National Bureau of Statistics said Thursday that its sub-index for rent inflation in China shot up by 4.1 percent year-on-year in April, and the country's food prices also increased by 4 percent year-on-year in the same month.

The consumer price index (CPI), a primary gauge of inflation, rose by 2.4 percent year-on-year in April, higher than expectations of 2.3 percent, and the rate is expected to increase.

More than 30 percent of the residents in Beijing and Shanghai, mostly young professionals, rent houses, and they are under heavy pressure now, the Xinhua report said. The average rent in Shanghai is expected to go up by up to 15 percent this year, Luo Yinshen, an analyst at housing brokerage 21st Century China Real Estate, told the news agency.

"We expect CPI inflation to be on an uptrend over the next several months, rising to 2.7 percent in May and 2.9 percent in June," Nomura China Chief Economist Zhang Zhiwei said in an e-mail sent to the Global Times Thursday.

Awash with cash

Most of the world's major central banks, including the US Federal Reserve, the Bank of Japan and the European Central Bank (ECB), have been implementing quantitative easing policies recently, creating an excess amount of money to seek higher returns in the global market, Liu Ligang, chief China economist at Australia & New Zealand Banking Group, told the Global Times Thursday.

The higher interest rates in China and a strong yuan, both resulting from government controls, are the main reasons why a large amount of hot money has flowed into the country over the past few months, Liu said.

Because the yuan is not freely convertible, Chinese banks have to absorb the foreign exchange earned by non-bank entities, mainly trading firms, by law.

According to the People's Bank of China, the country's central bank, domestic banks bought 1.2 trillion yuan worth of foreign exchange from non-bank entities in the first quarter of 2013, up significantly from 495 billion yuan for the whole of 2012.

"The large capital inflow has pushed up asset prices in China, and when the government takes measures to rein in housing prices by restricting home purchases, more people turn to renting, thus driving up the rental prices in big cities," Liu explained.

The US Fed has been injecting liquidity at a pace of $85 billion a week, and there is no sign of it tapering off any time soon, Hervé Goulletquer, head of global markets research at Crédit Agricole CIB, said in a newsletter on May 6.

The ECB has conducted similar moves, and it "sent a clear message that it stands ready to do more if needed," said Goulletquer.

Over-reporting

Chinese export growth data for April released Wednesday surprised the market, recording a rise of 14.7 percent year-on-year, well above estimates of 9.2 percent. Imports grew by 16.8 percent year-on-year, also higher than expectations.

Analysts suggested this abnormally high trade data indicates irregular activities by importers and exporters, possibly including arbitrage to take advantage of interest rate differences for yuan and dollars, as well as an appreciating yuan.

Also the data was not supported by weak neighboring economies, slowing-down throughputs at major ports and declining new orders, Liu said.

"We found that trade between the Chinese mainland and Hong Kong increased 55 percent in April, while between the mainland and the rest of the world (excluding Hong Kong) it grew by 12 percent," Liu said.

Most of the trade with Hong Kong took place in nearby Guangdong Province, and the province's overall exports in the first quarter of 2013 were far higher than the port throughputs, indicating over-reporting of the value of goods by exporters, Liu said.

Further evidence of over-reporting came from the strong growth of exports of high-value, small-sized products such as integrated circuit (IC) products, Larry Hu and Lu Ting, analysts at Bank of America Merrill Lynch, wrote in a research report in March.

In the first two months of the year, China's IC exports increased by 212 percent year-on-year.

"We believe these IC products might be being used to over-report exports, as transporting them is cheap, but the unit value can be easily manipulated," they said.

The State Administration of Foreign Exchange issued a notice on May 6, saying that it is enforcing strict measures to clamp down on cross-border hot money flows.

Hard to prevent arbitrage

While the over-reporting issue may be controlled by more stringent supervision, there are other ways around the system, a bank insider said.

Because they have trading licenses, traders can take out loans denominated in dollars and then send the money to a partner company in Hong Kong by using it to pay for imports, a forex trader in a foreign bank in Shanghai told the Global Times Thursday on condition of anonymity.

They can then get the same amount back again by exporting goods two or three days later and banks will then exchange the exporters' dollars for yuan.

The interest on yuan deposits is higher than for dollars, the forex trader said, enabling his clients to make a return of around 0.5 percent. "Doing it 50 times a year, it adds up to an annualized return of 25 percent," he said.

But ordinary consumers who do not have a trading license are at a disadvantage, as their salaries might not keep pace with the inflation being fueled by the hot money inflows.

Without sufficient and timely financial and social reform, the wealth gap in China will only be exacerbated by the excess global money supply, and average people will find it ever harder to afford an apartment, Liu warned.